Islamic Finance: Malaysia’s Journey
Malaysia International Islamic Financial Centre (MIFC) Promotions Unit
Hong Kong• Aims to become IF
gateway to China• Plans to issue
sovereign sukuk• Government is
finalising legislative amendments in 2012 to provide a tax system that promotes certain IF structures
UK• Gov’t aims to make London as a
global gateway for IF• 5 FSA-approved Islamic banks
and Takaful operators• Plans to issue sovereign sukuk,
amend tax law on IF
JapanLaw passed allowing banks to do IF transactions
France• Passed regulations
to support IF activities
• Made fiscal & legal adjustment for IF transaction i.e. tax guidelines on sukuk & murabahah Bangladesh
• Launched separate money market for Islamic banks
Tunisia• Aspires to be IF centre in
Maghreb• Targeting to issue sukuk in
end 2012• Government has set up a
working group that will study how to develop Islamic finance in the country.
Malta• Plans to position
as IF hub for the Mediterranean
Oman• First Islamic bank will
be operational second half of 2012
Turkey• Announced IFC Istanbul
with focus includes interest-free financial business
BruneiAim to become Islamic financial services hub for Asia
Increasing number of Islamic financial institutions in over 75 countries
• Over 600 Islamic banks & 90 takaful companies
Islamic finance..gaining traction in traditional & emerging economies
2China has also made progress in Islamic finance…
MENA:• Islamic banking set to grow by an additional
$575 billion by 2015• Potential demand for an estimated 100 new
Islamic financial institutions across MENA by 2020
• Higher possibility of issuing a sovereign sukuk
Sub-Saharan Africa:• Large ‘room to grow’ in IF due to the under-
development of its banking industry
Asia• Asia and Saudi set to dominate the sukuk
market in with high quality quasi-sovereign issuers taking the lead, especially to fund infrastructure and projects in the oil, gas, petrochemicals and transport sectors
• India to tap GCC fund via Islamic finance
Immense potential and opportunities in Islamic finance
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• IBFIM
• INCEIF
• ISRA
• Central Bank Act 2009
•
1983 1993 2001 2010
• Financial inclusion to fulfill Muslim’s needs
• Mobilisation of deposit started by Pilgrimage Fund (1963)
• Relevant acts were enacted• 1st Islamic bank & takaful operator• Shariah Committee • 1st Islamic Sukuk
• FSMP – 10 year roadmap
• Foreign Islamic banks
• Islamic subsidiaries
• New takaful & retakaful licences
• Tax neutrality policy
• Islamic windows
• 2nd Islamic bank
• 2nd takaful company
• Islamic money market
• Shariah Advisory Council
Inception stageInstituting foundations of
Islamic finance
Intermediate stageInstitutional building, stimulate
competition, activity generation & market vibrancy
Advanced stage Strategic positioning & international integration
Building foundation of legal, regulatory & Shariah framework
Increase number of players, develop financial markets & enhance Shariah governance
Market liberalisation, upgrading infrastructures, strengthen overall Islamic finance landscape
FSMP – Financial Sector Masterplan, IBFIM - Islamic Banking and Finance Institute of Malaysia, INCEIF - International Centre for Education in Islamic Finance, ISRA – International Shariah Research Academy for Islamic Finance
Malaysia’s gradual & holistic approach to Islamic finance…
Talent & research development
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Supported by:
MalaysianFinancial System
Islamic Banks & Takaful Companies Islamic
Capital Markets
Islamic Money Markets
Money Markets
Capital Markets
Dual Banking System
Islamic Capital Market
TakafulConsistently register double digit growth
Contribution: RM4.9b (13.6% market share)Asset: RM17.7b (8.7% market share)
Almost 50% of total outstanding debt securities14% from the total industry assets under management (AUM) - inclusive of collective investment schemes and private mandates89% of listed securities are Shariah compliant
Islamic BankingStrongly positioned within overall financial system
Total asset: RM459.2b (USD150.5b) (23.1% market share)Total financing: RM274.8b (USD90.1b) (24.5% market share)Total deposits: RM312.1b (USD102.3b) (23.2% market share)RWCR: 14.95% (Banking sector: 14.7%)Net NPF: 1.4% (Banking sector: 1.7%)
Note: Data as at Q1 2012 ,Asset, Financing & deposit figures include DFIs
Integrated human capital infrastructureIntegrated human capital infrastructure
Professional services with familiarity on IFProfessional services with familiarity on IF
Diversified players with wide-ranging productsDiversified players with wide-ranging products
Conventional Banks & Insurance Companies
Islamic money marketAnnual trading volume of exceeds RM1 trillion
Islamic finance - integral component of the Malaysian financial system
Other Financial Intermediaries that offers Islamic financial services
16 Islamic Banks
5 International Islamic Banks
10 Islamic windows
Shariah Advisory Council for Islamic Banking and Takaful
Credit Guarantee Corporation
Cagamas Berhad (National Mortgage Corporation)
Pilgrims Funds Board
3 full-fledge offshore Islamic banks12 offshore Islamic windows5 offshore takaful / retakaful
operators12 offshore retakaful windows
12 brokers with takaful windows
INCEIF
IBFIM AIBIM
Complementary Entities
ISRA
MTA
Shariah Advisory Council for Capital Markets
Shariah Advisory Council for Labuan Financial Centre
Today’s landscape of Islamic financial system
Bursa Suq al Sila’825 Shariah
approved countersIslamic Indices
Islamic stock broking companies
PIDM
INCEIF – International Centre for Education in Islamic Finance ISRA – International Shariah Research Academy for Islamic FinanceIBFIM – Islamic Banking and Finance Institute of MalaysiaIFSB – Islamic Financial Services Board
IILM – International Islamic Liquidity Management CorporationPIDM – Perbadanan Deposit Insurans Malaysia
[MDIC – Malaysian Deposit Insurance Corporation]AIBIM – Association of Islamic Banking Institution MalaysiaMTA – Malaysian Takaful Association
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6 Development Financial
Institutions
11 Takaful Operators
4 Retakaful Operators
1 International Takaful
Operators
38 Islamic fund managers Shariah screening for
Shariah-compliant securitiesIslamic capital market
players
IILM
International organisations hosted by Malaysia
IFSB
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Different training platforms for financial services professionals at different stages of career development
Comprehensive & coordinated efforts in human capital development is essential to caters for the need of IF industry
International Shariah Research Academy
•Centre for applied research in Shariah & Islamic finance and to become reference point for Shariah interpretations
•Platform for discourse among scholars, academicians, regulators & practitioners
Entry level Leadership
+Institutions of Higher Learningoffers both undergraduates & post graduates programmes on Islamic finance
International Centre for Education in Islamic Finance to provide professional & academic qualifications in Islamic finance
International Centre for Leadership in Finance for training in management, leadership & governance through the Financial Institutions Directors’ Educationprogramme, including in the area of Islamic finance
IoHL
Islamic Banking and finance Institute Malaysia (IBFIM) focuses on Islamic banking, takaful & Islamic capital market program
ISRA
ibfim
Reinforced by continuous effort to promote Shariah research and intellectual discourses
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GOVERNING INFRASTUCTURE
Legal & Tax Framework
Regulatory Framework
Shariah Governance Framework
Shariah Advisory CouncilShariah CommitteesShariah ParametersShariah Governance Framework
Shariah compliance …. apex of Islamic financial system Islamic Banking Act 1983
Takaful Act 1984Government Funding Act 1983Central Bank Act 2009Capital Market Services Act 2007
Enabling Infrastructure
Corporate governanceRisk managementCapital Adequacy StandardsConsumer protection
Ensure financial stability
Well-developed Governing Infrastructure…Preserving sound Islamic financial system…
Comprehensive legal framework to govern specificities of Islamic finance
Ongoing effort
• Tax neutrality principles• Law Review Committee• Law Harmonisation Committee
Specific legislation
• Islamic Banking Act 1983 • Takaful Act 1984• Labuan Islamic Financial Services and
Securities Act 2010 • Government Funding Act 1983
Shariah Advisory Council as highest authorityThe court or arbitrator shall take into consideration rulings of BNM’s Shariah Advisory Council (SAC) & to refer any Shariah questions to the SAC for its ruling - Section 56 (1)
Rulings of SAC shall be binding on Islamic financial institutions, courts or arbitrators - Section 57
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Recognition of dual financial systemThe financial system shall consist of conventional & Islamic financial system - Section 27
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Malaysia International Islamic Financial CentreBNM has the role to develop Malaysia as an international Islamic financial centre- Section 68(1)
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Central Banking of Malaysia Act 2009
Dispute Resolution Mechanism
• Dedicated High Court judge to adjudicate Islamic finance cases
• KL Regional Centre for Arbitration • Financial Mediation Bureau as alternative
dispute resolution mechanism
• Banking and Financial Institutions Act 1989• Development Financial Institutions Act 2002• Malaysia Deposit Insurance Corp. Act 2005
Supportive Legislations
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Regulatory framework for Islamic finance…a combined approach Adapt existing sound practices and formulate specific policies to address Islamic financecharacteristics…
Capitalize on strength of conventional regulatory system
• Conventional regulatory infrastructure already in place & proven effective
• Leverage on existing framework to address similar risks in Islamic finance
• Islamic finance are governed by similar regulatory framework as in conventional banking
• Corporate governance
• Capital adequacy
• Liquidity management
• Financial transparency & market discipline
• Risk management and auditing
Gradual establishment of Islamic finance regulatory framework
• Modify existing framework to address salient characteristics of Islamic finance
• Establish Shariah compliance & governance mechanism
• Adoption of international Islamic prudential standards issued by Islamic Financial Services Board - to addresses unique characteristics of Islamic financial transactions
… to minimise regulatory arbitrage10
Shariah Governance FrameworkCorporate Governance Guidelines
Capital Adequacy Framework for IbsGuidelines on Recognition and Measurement of PSIA Risk Absorbent Risk Based Capital Framework for Takaful Operators
Framework of Rate of ReturnGuidelines on Profit Equalisation ReserveGuidelines on Property Development & Investment Activities Takaful Operational Framework
Firewalls for Islamic window operationGuidelines on Musharakah & MudharabahGuidelines on Financial Reporting
Guidelines on Late Payment ChargesGuidelines on Rebate (Ibra’) for Sale-based Financing
Guiding Principles of Risk Management
Guiding Principles on Corporate Governance
Supervisory Review Process
Capital Adequacy Requirements for Sukuk, Securitization & Real Estate Investment
Transparency & Market Discipline
Governance for Islamic Collective Investment Scheme
Guiding Principles on Shariah Governance Systems
Conduct of Business for IIFS
Governance for Takaful Undertakings
Solvency Requirements for Takaful Undertakings
Capital Adequacy Standards
DOMESTIC REGULATIONSeparate guidelines on areas specific to IF
INTERNATIONAL BEST PRACTICES Prudential standards issued by IFSB
Convergence towards international best practices…
Guiding Principles on Liquidity Risk Management
Guiding Principles on Stress Testing
Governance
Risk management
Capital adequacy
ConsumerProtection & Fair Dealing
Otherprudential regulations
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Shariah Governance Framework for IFIs
Key Features:
An apex authoritative body for the ascertainment of Islamic law for the purposes of Islamic financial business
Advise the Bank (and also IFIs) on any Shariah issue relating to Islamic financial business
Appointed by the King, on the advice of the Minister of Finance after consultation with the Central Bank
The court & arbitrator shall take into consideration any published rulings of the SAC, prior to any proceedings on Shariah matters
Rulings made by the SAC shall be binding on IFIs, court or arbitrator
Objectives:
Set out the expectations of the Bank on an IFI’s Shariah governance structures, processes & arrangements to ensure that all its operations & business activities are in accordance with Shariah
Provide comprehensive guidance to the board, Shariah Committee and management of the IFI in discharging its duties in matters relating to Shariah
Outline the functions relating to Shariah review, Shariah audit, Shariah risk management and Shariah research
Central Bank of Malaysia Act 2009
Shariah Governance in Malaysia
Guided by two important legislation & guidelines
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Proper governance provides assurance on Shariah compliance & enhance public confidence on Islamic finance operation:
1. SAC’s legislative stature as highest authority for Shariah matters in Islamic finance is accorded under the Central Banking Act.
2. Shariah committee of IFIs are fully accountable on decision, views & opinions related to shariah matters
3. Board & senior management with sufficient expertise & capability in dealing with issues specific to Islamic financial transactions
4. Emphasise the function of Shariah review & Shariah audit to provide check & balance
5. Shariah Committee member of another institutions within the same industry shall not be appointed –avoid conflict of interest & maintain info confidentiality
6. Institutionalise mutual respect by recognising differences of Shariah interpretations in various jurisdiction
7. Shariah parameters provide guidance on main features, principles & rulings of Shariah contracts
Two-tier Shariah assurance supported by a credible Shariah governance structure
Shariah as overarching principle in Islamic finance
Shariah Compliance Functions :Shariah Review
Shariah Audit
Management
Shariah Governance Framework
Board Shariah Committee
Shariah Advisory Council (SAC)
Shariah Parameters
Shariah Resolutions & Rulings
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International IslamicLiquidity Management Corporation
Islamic Finance Stability Forum
Islamic Financial Services Board
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• IFSF is based at IFSB and established in April 2010• Strategic platform for IFSB members to build cross-border
dialogue to promote financial stability within the Islamic finance system
• Collaboration in areas of surveillance, crisis prevention, implementation of international standards, capacity building and development of emergency infrastructure
• IILM commenced operation on 1 January 2011• Supranational to facilitate cross-border short-term liquidity
management• Diversify availability and range of high-quality liquid and
tradable products • Enhance international linkages of Islamic financial markets• Founding shareholders: 12 CBs of Indonesia, Iran, Kuwait,
Luxembourg, Malaysia, Mauritius, Nigeria, Qatar, S. Arabia, Sudan, Turkey, UAE & 2 MDBs i.e. IDB & ICB
Malaysia, the host country of the IFSB, plays leading role in establishment of IFSB in 2002
International standard-setting organisation issuing global prudential standards & guiding principles
IFSB has issued 13 IFSB standards & 5 Guidance notes
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Islamic Financial Services Board
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Global Islamic finance initiatives towards ensuring financial stability & sustainability
Building blocks for an effective Islamic finance ecosystem
Facilitative & robust framework to support Islamic financial transactions & to provide legal certainty
Effective dispute resolution mechanism/ judicial system
Facilitative tax regime –tax neutrality policy
Effective Shariah governance framework in accordance with Shariah principles
Dedicated laws or minor amendments to existing acts
Robust regulation & supervision to ensure financial stability & market discipline which considers uniqueness of Islamic financial institutions
Effective firewalls for Islamic window operations to avoid commingling of funds
Strong safety net –Deposit protection scheme
Adoption of international best practices: Basel & IFSB
Well functioning infrastructure for efficient management of liquidity & surplus funds
Progressive development of financial market instruments
Efficient clearing & settlement system
Supportive Central Bank liquidity management operation – specific Islamic instruments
Share existing financial infrastructure or develop specific infrastructure
Effective, comprehensive & holistic talent development infrastructure
Greater partnerships & collaboration between industry & academia
Focused research in Islamic finance for greater innovation
Dedicated training institutions & research centres or leverage on existing infrastructure
Increases potential to conduct cross-border Islamic financial transactions, leading to greater internationalisation of Islamic finance 15
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Vision
• Institutional capacity enhancement• Financial infrastructure development• Regulatory framework development
Focus Areas
• Increased diversity in terms of players as well as financial products & services
• Greater range of offerings in terms of Islamic fund & wealth management activities
• Enhanced liquidity, market efficiency as well as depth and vibrancy of Islamic financial markets, supported by robust platforms
• Strengthened business framework & enhanced financial linkages between different jurisdictions
• Optimise synergy with other Islamic financial centres to further stimulate Islamic financial transactions & IF education & training
The Next Roadmap: Internationalisation of IF
Financial Sector Masterplan
2001-2010
Financial Sector Blueprint2011-2020
Roadmap
Developing an Islamic banking & takaful industry that is in parallel with conventional banking & insurance
Continue to expand IF in Malaysia, reinforced by the global expansion where creation, preservation & distribution of wealth are effectively undertaken by market participants in a manner that promotes the universal values of Shariah
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• Regulatory framework
• Talent supply
• Shariah harmonisation
Development & regulatory challenges
• Facilitative legal environment
Regulation in line with international best practices• Adoption of prudential standards set by Islamic Financial
Services Board • Avoid potential of regulatory arbitrage in dual financial system• Takes into account distinctive features of Islamic finance
Ensure conducive environment for Islamic finance transactions• Equal tax treatment vis-a-vis conventional financial transactions• Ongoing review of applicability / potential impediments of existing
legal and statutory requirements on Islamic finance
Increase pool of talent• Ensure sufficient pool of talent - Shariah & finance conversant
(both within industry and regulatory authorities)
Greater consistency in Shariah pronouncement• Regional and international Shariah dialogues• Promote mutual understanding & respect on Shariah decisions globally
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World Class Islamic Financial Centre
Malaysia International Islamic Financial Centre (MIFC)
Islamic Capital Market
(players & instruments)
International Business
(banking & retakaful)
Talent Development
Professional Service
Providers
“To create a vibrant, innovative and competitive international financial services industry in Malaysia
supported by high caliber human talents, world-class infrastructure, and best international standards”
Financial Institutions Gov’t Ministries & AgenciesFinancial Market Regulators
Professional Services Firms Human Capital Development InstitutionsCommunity
World Class Legal, Regulatory and Shariah Framework
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Opportunities in Malaysia under the MIFC initiative
Building inter-linkages
International Business Banking,
Retakaful & Domestic Islamic
Bank
Islamic Capital Markets
Instruments & Players
International Islamic Bank (IIB) •New licences with tax exemption status for international Islamic banking• Licensed under the Islamic Banking Act 1983 (IBA), incorporate as a company or branch•100% foreign ownership allowed Business - wide range of Islamic banking business in Malaysia with residents & non-residents in foreign currency as well as limited ringgit transactions:
• New Islamic Fund Management Company licence
• Licensed under the Capital Markets and Services Act 2007(CMSA) Business – ringgit & non-ringgit management of retail & institutional investors, including establishing & distributing unit trust funds
• Incentives for layers and investors
Retakaful• Foreign currency or domestic retakaful licence (domestic retakaful licence for ringgit and non-ringgit business )
Opportunities in Malaysia under the MIFC initiative
Domestic Islamic Bank• Acquire up to 70% equity in domestic Islamic bank and maintain minimum USD1 billion paid-up capital
Liquidity management and Wealth management
To support Islamic financial institutions in meeting their liquidity requirements
Wealth and fund management:• 18 Islamic fund management companies and a wide-ranging Islamic finance products
• Clearing and settlement system• Central Bank Liquidity management operation
Supported by:
Money Market
Potential collaboration:• Live transactions for liquidity management between Islamic banks in Oman and Malaysia• Industry task force on joint development of cross-border Islamic liquidity management products suitable for both countries.
Sukuk issuance
Opportunities for issuers to use Malaysia as fund-raising platform
Cost effective and efficient time to marketSupportive framework and facilitative approval processDeep & advanced sukuk market with active secondary market trading Large amount of issuances with wide range of tenure including longer tenureBroad range of innovative issuanceWide range of investor base
Sukuk issuance…continued
Malaysia - evolving into a multi-currency sukuk market
Khazanah Nasional• Exchangeable sukuk - USD750 m,
USD850m, USD550 m (2006, 2007, 2008)
• SGD1.5 bil (Aug 2010)• RMB500 million (Oct 2011)
Petronas USD1.5 bil (2009)
Nomura USD100 mil (July 2010)
Government of Malaysia • USD1.25 bil (2010) - 2nd global sovereign
sukuk• USD 2 bil (2011) Wakalah Global Sukuk
– 3rd global sovereign sukuk
Axiata Group RMB1 bil (2012)• Largest RMB sukuk
Islamic Development Bank USD500 mil (Oct 2010)
• USD500 mil (2010) • USD 800 mil (2012)
Selected Ringgit Sukuk Issuance by Foreign Entities
Notable Multicurrency Sukuk Issuance
MYRMYR
MYR
US$
SG$
RMB
CPO Supplier A
CPO Supplier B
CPO Supplier C
BMIS*/BSAS**
Islamic Bank A
Client / Islamic Bank B
Commodity
Payment (spot)Payment (deferred)
Trading & clearing engine
Trading platform - Bursa Suq Al Sila (commodity murabahah house)
* Shariah-compliant wholly-owned subsidiary of Bursa Malaysia** Bursa Suq Al-Sila
Murabahah
World’s 1st Shariah-compliant international commodity trading platformObjective - enhance liquidity management for Islamic financial institutionsConcept - Commodity MurabahahModus operandi –
- A party buys commodity at a certain cost and sells it to a customer at a cost-plus-profit basis.- The customer then pays the amount & profit to the party on a deferred-payment basis.- The customer then sells back the commodity to the commodity market on spot for cash.
Commodity/Currency - Crude palm oil, plastic resin & RBD palm olein / Ringgit Malaysia-denominatedLater - commodity will be expanded to other Shariah approved commodities & conducted in multi-
currency denominated, hence provide more choices, access and flexibility for international financial institutions to participate in this market.
